A guide to small business restructuring: Part two

DPNs, secured creditors, trusts and other complications.

Since my December 2020 article on small business restructuring, the relevant Act, Regulations and Rules were passed and subsequently became operative on 1 January. As at 27 January no appointments have been advertised on the Australian Securities and Investments Commission’s (ASIC) Published Notices website, however five companies have published notices of the intention to rely on temporary restructuring relief.

With the benefit of time to consider the laws in greater detail and the insights of many astute thinkers in the insolvency field, I remain of the opinion that a debtor-in-possession regime deserves a place in our insolvency framework, but acknowledge that the regime we have is in several respects not the perfect expression of the concept. Specifically, the new regime is procedurally dense, and the legislation is piecemeal (like the rest of our insolvency laws) making the process neither simple nor easy from a restructuring practitioner’s perspective.

Doubts and reservations aside, final judgement should be reserved until we really see restructuring in action. Until then, this article updates some aspects of the regime addressed in my previous article and highlights several potential complications that could have unintended consequences.

Status of contingent liabilities

The first public draft of the laws was subsequently amended such that contingent liabilities are now captured.[1] Contingent liabilities, such as damages and warranty claims, are often difficult to adjudicate because they involve complex evidentiary, factual, and legal issues. The admissibility of a contentious contingent liability may lead to uncertainty as to whether a company is below the $1M eligibility threshold or complicate the task of settling the list of a company’s liabilities. That is not to say that contingent liabilities should be excluded—as that potentially creates a different set of problems. It might be the issue cannot be resolved without the wisdom gained through experience.

Remuneration

To clarify the position regarding a restructuring practitioner’s remuneration:

• A restructuring practitioner is entitled to a fixed fee for work undertaken during the planning and voting phases of the process as determined by the directors by a resolution passed on or before the date of appointment.[2] The directors may also pass a resolution determining a method for working out the remuneration amount that a restructuring practitioner would be entitled to receive for work relating to a legal proceeding[3] pertaining to the restructuring.[4]
• A restructuring practitioner is entitled to receive remuneration as a specified percentage of payments made to creditors under the restructuring plan.[5]

The list of debts and claims

Settling the final list of a company’s debts and claims is one of the restructuring practitioner’s responsibilities. The list available on the date of appointment would be the starting point, however there is the potential for wide ranging discrepancies for a host of reasons, such as un-invoiced supplies, unreported ATO tax debts and other statutory liabilities such as payroll tax and WorkCover premiums.  If the company's accounts are not up to date, there is a risk that related-party loans and other related-party liabilities are understated. Additionally, there could be contingent liabilities and secured creditor shortfalls that need to be quantified. While the scale of these problems will only become evident with time, they could potentially lead to an increase in the amount charged by practitioners. Also, a creditor may be more inclined to dispute a relatively minor discrepancy in their debt/claim given this additional work will not increase the restructuring practitioner’s fee and thus will not diminish the dividend. Therefore, creditors may have a greater incentive to fight for every dollar.

Unperfected security interests

Secured creditors must be aware of how a restructuring plan might affect their security interests, particularly secured creditors that have “unperfected” security interests within the meaning of the Personal Property Securities Act 2009 (PPSA). Subject to section 267 of the PPSA, the holder of an “unperfected” security interest to which the PPSA applies will, in practical terms, lose that security interest should the relevant company undergo restructuring. This would be the case even if the process is aborted or fails and the status quo is returned.[6]

Director penalty regime

The director penalty notice (DPN) regime in Schedule 1 of the Tax Administration Act[7] has been amended to include restructuring as a means of remitting a director penalty. It would appear the amendments have inadvertently clipped the ATO’s wings as remittance will occur when the process is aborted or fails. The DPN lockdown rules continue to apply; therefore, restructuring is not an option to remit a relevant debt that goes unreported for at least three months after the due date.

The restructuring practitioner’s power to terminate

Before a restructuring plan is made, the restructuring practitioner may, at any time, terminate it under section 453J of the Corporations Act if they believe that:

• The company is ineligible, or
• It would not be in the creditors’ best interests to make a restructuring plan, or
• It would be in the creditors’ best interests for the restructuring to end, or
• It would be in the creditors’ best interests for the company to be wound up.

• Upon determining that a company does not meet the eligibility criteria, when would it not be appropriate to terminate?
• Are practitioners under a positive obligation to establish whether it would be in the creditors’ interests for a company to be wound up?

Trading trusts—what about automatic removal clauses?

The practical and commercial impact of an automatic removal clause being triggered by the voluntary administration or liquidation of a corporate trustee of a SME trading trust have been addressed ad nauseum in recent years (without bringing us closer to a satisfactory resolution). In a small sample of trust deeds reviewed for the purposes of this article I found that one of the common triggering events for automatic removal was “making an arrangement or composition with creditors”—which appears wide enough to encompass restructuring. It would be prudent to consider the impact of an automatic removal clause before a trustee company enters into restructuring. In many cases pre-emptive action might be needed to avoid the clause being triggered, however there may also be occasions where automatic removal is a favourable outcome.

Temporary restructuring relief

One requirement for a company seeking temporary restructuring relief is that its directors make and file a declaration with ASIC which, among other things, sets out what steps the company has taken, and what steps it intends to take, to appoint a restructuring practitioner.[9]

One step worth taking is to contact one of Worrells’ 28 restructuring practitioners available nationally across the firm. We have practitioners in every major capital as well as the systems, resources, and capacity to take appointments immediately. In short, we are ready and here to help.   [1] Regulations 5.3B.01 and 5.3B.03 of the Corporations Regulations 2001 (“Regulations”). [2] Rule 60-1B of the Insolvency Practice Rules (Corporations) 2016 (“Rules”) [3] It is unclear what type of legal proceeding the drafters had in mind. [4] Rule 60-1B of the Rules. The directors must also have consented to the relevant proceeding. The amount of remuneration does not need to be a fixed sum. The use of hourly rates in accordance with the practice in other forms of external administration is one option. [5] Rule 60-1C of the Rules. The percentage must be specified in the plan and be approved by creditors. [6] In assessing the risk for secured creditors, it is critical to note that the directors can terminate a restructuring without cause at any time before a restructuring plan is circulated to creditors. In some cases, an aggrieved creditor might be able to apply to court for appropriate relief under section 588M of the Corporations Act 2001, however that would be a largely commercial decision. [7] 1953 (Cth) [8] The scope of the power is unprecedented, it has no equivalent in any other type of external administration in Australia. [9] Section 458E of the Act.